Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

Bid to End Tax-Exemption Stirs Up Bond Summit

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MIAMI BEACH — A bipartisan effort is under way to eliminate the tax exemption on municipal bonds, attorney Rosemary Becchi, a partner at Patton Boggs LLC, said at The Bond Buyer and Bond Dealers of America’s Third National Municipal Bond Summit here Thursday.

“I think it is a very real problem,” she warned.

In addition to tax exemption, other tax reform measures under consideration could have “large consequences for state and local governments,” said Georgetown University Law Center professor John Buckley.

Some of those include proposals that would eliminate the deduction of state and local taxes and mortgage interest from federal taxes, which would drive up costs for taxpayers and make it harder for local governments to increase property taxes to support their budgets, he said.

State and local issuers should be involved now in the debate over federal tax reform even though the passage of the measures affecting the municipal bond market could be two or three years away, the experts said.

Municipal governments could have a say in guiding the outcome of tax reform but only if they began a grassroots effort now, Buckley said, adding: “It’s easier to change minds now than later.”

In another session Thursday, market specialists said they carefully advise investors on the state of muni market issuers to counter a barrage of misleading comments about potential defaults and large, long-term pension obligations.

Much discussion at the conference centered around the comments of financial analyst Meredith Whitney, who in December predicted there will be $100 billion or more of municipal bond defaults this year.

Panelists rejected Whitney’s estimate.

“There is strong consensus that the vast majority of municipalities have manageable debt levels,” said Peter Coffin, president of Breckenridge Capital Advisors Inc. “We do think a level of fear has been hyped up to a level that is rationally unjustified.”

To counter negative headlines and misinformation, Coffin said his firm is in regular contact with clients reviewing portfolios.

Overlooked in the news about the state of issuers is the fact that they have the power to raise revenue, said James Lebenthal, a director at Lebenthal & Co. LLC.

“Debt service is not paid out of the last dollar in the treasury. It is the first,” he said. “There is an obligation of government to survive.”

Similar misconceptions about financial stability have occurred in media reports related to the long-term pension and other post-employment obligation benefits of local and state governments, panelists said.

Unfunded liabilities are long-term problems that issuers are dealing with, but do not present short-term financial problems, they said.

“What is difficult is the way it’s getting reported,” said Ben Watkins, director of Florida’s Division of Bond Finance.

Watkins called some media reports about unfunded obligations “sensationalized journalism” that present a perspective to the general public that is difficult to overcome.

“I don’t view pensions and OPEBs as a systemic issue that’s going to lead to some catastrophe,” he said.